How To Fix Weak A 401(k) So You Can Actually Retire

For many, 401(k)s are proving to be a big let-down. Baby boomers are beginning to retire in waves, and many discover to their horror that they don't have enough money to pay for the three decades or more they will spend in retirement. Ken Weingarten, a very thoughtful financial advisor who runs Weingarten Associates in Lawrenceville, N.J., offers an expert diagnosis of the problem and an intriguing proposal to fix the weaknesses that plague 401(k)s. Ken's take:

Is the retirement system itself the reason so many Americans are under-saved for retirement? Is the old-style pension model better, or should employees control their own retirement funds?

Economist Teresa Ghildarducci blames the 401(k) system that most of us use to save for retirement. She correctly points out that most Americans are simply not wired for the complexities of choosing investments for their own retirement. I agree that most do not even know how much they should save for their own retirement.

The pension model from what seems to be a bygone era actually worked quite well. With a defined benefit plan, the employer put money aside for you in a safe place and, based on your pay and years of service, you were entitled to a pension upon retirement.

But then, most companies found that they could save money and shift the risk to the employees by a 401(k) plan. Unfortunately for their employees, most folks do not know how much they need to save, or how to invest.

As Ghilarducci points out, Social Security is simply not enough for many folks once they stop working. A controversial proposal, first aired during the Bush Administration, is to privatize Social Security. Supporters talk about giving individuals control over their own money. Given how poorly the shift from pensions to 401(k)s has worked, I think this is a terrible idea.

The economist raises an interesting idea about forcing people to save more: Add private accounts to Social Security. In other words, keep the current system that guarantees a certain benefit, and then collect an extra percentage of workers’ income to place into a private account. I even favor a partial government match of these mandatory savings. Of course, amid the current pressures to curb new federal spending, this proposal will not go very far.

As for Social Security, it’s necessary to raise the retirement age eventually. Most Americans live longer. Increasingly, we are a knowledge economy, where workers use their brains to make a living and not their hands. What about those with physically demanding jobs? Certainly those folks are harmed by raising the retirement age, but a supplemental private account could make up the difference.

In a knowledge economy, we need to readjust what retirement even means. Traditional thinking is that, when you reach a certain age, you simply stop working. Yet now, more people are continue to work either full- or part-time even after retiring. While some do this for the income, many keep working to stay active.

America’s current retirement system assumes that workers stay at their jobs for over 40 years, they never get divorced, ill or disabled, never have to help adult children financially and retire in their early 60s. This is not the world that we live in anymore, and the system needs to change to reflect modern realities. We retire later. Directing one’s own retirement funds is not working for many. Hopefully, our political leaders will someday be willing to change the system for everyone’s benefit.